Fit for 55 – EU recognises the need for a broad alternative fuels infrastructure across Europe

In the context of the ‘fit for 55’ package, published on 14 July 2021, the European Commission proposed the adoption of a new Regulation for the deployment of an alternative fuels infrastructure; the new Regulation will repeal Directive 2014/94/EU (DAFI).

The initiative seeks to ensure the availability and usability of a dense, widespread network of alternative fuels infrastructure throughout the European Union (EU), with the aim that all users of alternative fuel vehicles (including vessels and aircraft) will be able to move through the EU with ease, enabled by key infrastructure such as motorways, ports and airports. The specific objectives of the proposed Regulation are to: (i) ensure minimum infrastructure to support the required uptake of alternative fuel vehicles across all transport modes and in all EU Member States to meet the EU’s climate objectives; (ii) ensure full interoperability of the infrastructure; and (iii) ensure comprehensive user information and adequate payment options.

Background

The Commission’s proposal represents a recognition that mobility brings many socio-economic benefits to the European public and to European businesses, and also has a growing impact on the environment, including in the form of increased greenhouse gas emissions and local air pollution, and that the EU is still missing a complete network of alternative fuels infrastructure.

The Commission carried out an ex post evaluation of the DAFI, which found that it is not sufficient for the purpose of reaching the EU’s increased climate targets for 2030. The main issues include that Member States’ infrastructure planning often lacks the necessary level of ambition, consistency and coherence, leading to insufficient and not-well distributed infrastructure. Further interoperability issues with physical connections persist, while new issues have emerged over communication standards, including data exchange among the different actors in the electro-mobility ecosystem. Additionally, there is a lack of transparent consumer information and common payment systems, which limits user acceptance. Without further action by EU institutions, this lack of interoperability and easy-to use recharging and refuelling infrastructure is likely to become a barrier to growth in the use of low and zero-emission vehicles, vessels and, in the future, aircraft.

By ensuring that the necessary infrastructure for zero and low-emission vehicles and vessels is in place, this initiative will complement a set of other policy initiatives under the ‘fit for 55’ package that stimulate demand for such vehicles by setting price signals that incorporate the climate and environmental externalities of fossil fuels; such initiatives include the revision of the Emissions Trading System (Directive 2003/87/EC), and the revision of the EU Energy Taxation Directive (Directive 2003/96/EC).

Key provisions

Simplification

The review of DAFI increases the overall policy ambition and also includes some important simplification aspects, which primarily affects charge point operators and mobility service providers. The setting of clear and common minimum requirements aims to align business operations, as businesses will face similar minimum requirements in all Member States, and the new requirements will simplify the use of the infrastructure by private and corporate consumers (who currently face a plethora of use approaches) and enable better business service innovation. With these proposed changes, consumer trust in the robustness of a pan-European network of recharging and refuelling infrastructure may increase and thereby support the overall profitability of recharging and refuelling points, and support a stable business case. It is aimed that all market actors and user groups will benefit from lower information costs and, in the case of market actors, lower legal compliance costs in the medium term, as the requirements for infrastructure provisioning under the proposed Regulation will be better harmonised. Public authorities may also benefit from a coherent EU-wide framework that is aimed at making coordination with public and private market actors easier.

Coverage of publicly accessible recharging points

The proposal sets out specific provisions for the rollout of certain recharging and refuelling infrastructure for light- and heavy-duty road transport vehicles, vessels and aircraft.

Road transport

Member States are required to ensure minimum coverage of publicly accessible recharging points dedicated to light- and heavy-duty road transport vehicles on their territory, including on the TEN-T core and comprehensive network. In particular, Member States must install charging and fuelling points at regular intervals on major highways, at every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling.

Further provisions are introduced to ensure the user-friendliness of the recharging infrastructure. These include provisions on payment options, price transparency and consumer information, non-discriminatory practices, smart recharging, and signposting rules for electricity supply to recharging points.

Member States are also required to ensure until 1 January 2025 minimum coverage of publicly accessible refuelling points for liquefied natural gas (LNG) dedicated to heavy-duty vehicles on the TEN-T core and comprehensive network.

Vessels

Member States must ensure installation of a minimum shore-side electricity supply for certain seagoing ships in maritime ports and for inland waterway vessels. The proposal also defines the criteria for exempting certain ports and sets requirements to ensure a minimum shore-side electricity supply.

Member States are also required to ensure an appropriate number of LNG refuelling points in maritime TEN-T ports and to identify relevant ports through their national policy frameworks.

Aircraft

The proposed Regulation sets out minimum provisions for electricity supply to all stationary aircraft in TEN-T core and comprehensive network airports.

Provisions for Member States’ national policy frameworks

The provisions for Member States’ national policy frameworks are reformulated under the proposal, which makes provision for an iterative process between Member States and the Commission to develop concise planning to deploy infrastructure and meet the targets as provided in the proposed Regulation. It also includes new provisions on formulating a strategy for the deployment of alternative fuels in other modes of transport together with key sectoral and regional/local stakeholders. This would apply where the Regulation does not set mandatory requirements but where emerging policy requirements connected to the development of alternative fuel technologies need to be considered.

The approach to governance includes reporting obligations corresponding to provisions for Member States on national policy frameworks, and national progress reports in an interactive process with the Commission. It also sets requirements for the Commission to report on Member States’ national policy frameworks and progress reports.

Data provision requirements

Data provision requirements are set out for operators or owners of publicly accessible recharging or refuelling points on the availability and accessibility of certain static and dynamic data types, including the establishing of an identification registration organisation (IDRO) for the issuing of identification (ID) codes. Under this provision, the Commission is also empowered to adopt further delegated acts to specify further elements as required.

Common technical specifications

The existing common technical specifications are integrated with a set of new areas for which the Commission will be entitled to adopt new delegated acts. These will build on, as deemed necessary,  standards developed by the European standardisation organisations (ESOs).

The proposal also includes detailed provisions on national reporting by Member States to support the implementation of the Regulation, and common technical specifications or areas where delegated acts will need to be adopted to define common technical specifications.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Francesca Morra
Francesca Morra
Partner, Milan
+39 02 3602 1412

 

State aid’s coming home? Government publishes details of new UK subsidy control regime

On 30 June 2021, the UK Government published its much-awaited Subsidy Control Bill.  In this update, we explore the key aspects of the proposed UK subsidy control regime.  We conclude with five key takeaways.

Overview of the UK regime

The Subsidy Control Bill establishes a UK subsidy control regime, in accordance with the UK’s obligations under the EU-UK Trade and Cooperation Agreement (TCA).

Scope of the UK subsidy control regime

The Subsidy Control Bill adopts a definition of subsidy that closely follows the definition agreed under the TCA, which, despite differing wording, adopted substantially similar criteria as the definition of ‘State aid’ under EU law.

The Bill defines a subsidy as financial assistance which is given directly or indirectly from public resources by a public authority, and which:

  • confers an economic advantage to one or more enterprises;
  • is specific insofar as it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services; and
  • has, or is capable of having an effect on: (i) competition or investment within the UK, (ii) trade between the UK and another country or territory, or (iii) investment between the UK and another country or territory.

This definition is in one sense wider than that under the TCA (and indeed than under international trade agreements generally) in that it catches subsidies that do not impact international trade but only have effects domestically in the UK.  This reflects the broader policy aim of the regime – the protection of the UK’s own internal market, which has been an important feature of the Government’s post-Brexit agenda.  The protection of the UK’s internal market also forms one of the seven subsidy control principles with which subsidies should comply (see below).

Subsidy control principles

The Subsidy Control Bill sets out seven ‘subsidy control principles’ which public authorities must consider prior to granting any subsidy. Public authorities are prohibited from granting subsidies unless the authority considers that the proposed subsidy complies with the principles.

The subsidy control principles include the six principles with which the UK is bound to comply under the TCA (which are themselves very similar to the compatibility principles under EU State aid law) as well as an additional principle on the protection of the UK internal market. The seven subsidy control principles are:

  1. Subsidies should pursue a specific policy objective in order to remedy an identified market failure or to address an equity rationale (such as social difficulties or distributional concerns).
  2. Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
  3. Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.  That change should be conducive to achieving the specific policy objective of the subsidy, and should be something that would not be achieved without the subsidy.
  4. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
  5. Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other less distortive means.
  6. Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the UK.
  7. Subsidies’ beneficial effects in terms of achieving the specific policy objective should outweigh any negative effects, in particular negative effects on domestic competition or investment and international trade or investment.

The Bill also sets out the additional principles for energy and environmental subsidies from the TCA, as well as supplementary requirements in relation to other specific types of subsidies, such as rescue and restructuring subsidies and prohibitions on certain types of subsidies.  This includes the prohibition of subsidies granted on condition that the beneficiary relocates all or part of its economic activities from one area of the UK to another, which is another embodiment of the UK internal market imperative underlying the new domestic subsidy control regime.

The Government has committed to publishing guidance to assist authorities to self-assess compliance with these principles.

‘Categories’ of subsidy and compliance ‘routes’

The Subsidy Control Bill provides for different ‘routes’ through which subsidies may be granted in compliance with the subsidy control regime.  The relevant route depends upon the ‘category’ of the subsidy.  Under the regime, subsidies are categorised as follows:

  • Low risk subsidies: the Government proposes to set out categories of subsidies that are at low risk of distorting competition, trade or investment and create ‘streamlined subsidy schemes’ for these subsidies. Where a streamlined subsidy scheme route is available for a particular subsidy, public authorities will only need to demonstrate that the subsidy meets the specific compliance criteria for the scheme but will not need to assess compliance specifically against the seven subsidy control principles.
  • ‘Baseline route’: this is the ‘default’ position whereby public authorities will be required to self-assess compliance against the subsidy control principles prior to granting any subsidy.
  • Subsidies of Interest: ‘Subsidies of Interest’ are those subsidies that are more likely to affect competition, trade or investment, including by reference to the value of the subsidies and the sector in which the intended beneficiaries will operate. Subsidies of Interest are to be defined via secondary legislation at a later date. Public authorities proposing to grant a Subsidy of Interest will be able to make a voluntary referral for non-binding advice from the Subsidy Advice Unit – which will form part of the Competition and Markets Authority (the CMA). The advisory report will evaluate the compliance of the proposed subsidy with the applicable principles and requirements.
  • Subsidies of Particular Interest: ‘Subsidies of Particular Interest’ are those subsidies that are likely to be at the highest risk of affecting competition, trade or investment. Subsidies of Particular Interest will be subject to a mandatory referral to the CMA and public authorities will not be able to award such subsidies until they have received advice from the CMA.  Subsidies of Particular Interest will also be defined by secondary legislation.

In addition to the voluntary and mandatory referral processes, the Secretary of State for Business, Energy and Industrial Strategy will have a ‘call-in’ power whereby they can direct that a public authority seeks advice from the CMA.  The Secretary of State will have jurisdiction to make a call-in direction in respect of Subsidies of Interest, and any other subsidy where the Secretary of State considers that there is a risk of non-compliance with the applicable principles or requirements, or a risk of negative effects on competition or investment within the UK.  A call-in direction can be made before or after a subsidy is awarded.

The CMA review process under each of the voluntary, mandatory and call-in routes will be 30 working days, subject to an extension of up to 40 working days.  The clock will not start until the CMA has confirmed that it has all the information it requires to conduct the review, which as a practical matter may extend the timeframe considerably.

Certain categories of subsidy will be exempted from the regime entirely.  This includes: (i) de minimis subsidies (i.e. financial assistance of less than £315,000 over three years, (ii) subsidies granted in response to a natural disaster or for national security, and (iii) subsidies of less than £725,000 over a three year period granted to providers of Services of Public Economic Interest – e.g. entities entrusted with a public service obligation.

Judicial review of subsidies awarded by UK public authorities

The Subsidy Control Bill provides for the Competition Appeal Tribunal (CAT) to be the court of first instance for legal challenges to subsidies granted by UK public authorities.  The Bill provides that challenges may be brought by persons whose “interests are affected” by the grant of a subsidy (e.g. competitors of a beneficiary) or the Secretary of State.  The CAT’s review powers will be limited to the judicial review standard, rather than a review ‘on the merits’.

The CAT will have the power to order public authorities to recover subsidies that have been granted unlawfully, similar to the position with respect to unlawfully granted State aid under EU law.  The Bill does not otherwise mandate any specific types of relief for subsidies.  It is anticipated that early litigation before the CAT is likely to focus upon the scope of review and the appropriate relief to be granted where subsidies have been granted unlawfully.

Trade between the EU and Northern Ireland

Under the EU-UK Withdrawal Agreement, the EU State aid rules continue to apply in the UK in respect of measures which affect trade between the EU and Northern Ireland and so the UK subsidy control regime will apply subject to these rules.

Five key takeaways

  1. Greater scope for political intervention

The proposed call-in power for the Secretary of State under the Subsidy Control Bill reflects a trend towards conferring on Government greater powers of intervention seen elsewhere in post-Brexit legislation.  The Government’s right to initiate reviews of subsidies will sit alongside, for example, the Government’s power to review transactions on national security grounds and its position as the final decision-maker under the UK’s trade defence regime.

It remains to be seen how ‘trigger happy’ the Secretary of State will be, but the Government has consistently stated that it does not “intend to return to the 1970s approach of Government trying to run the economy or bailing out unsustainable companies.”  However, with the Scottish Government having expressed concerns that the regime “remove[s] power over subsidy control from devolved legislatures“, any exercise of the call-in right in respect of subsidies granted in Scotland is likely to prove controversial.

  1. Role of the CMA: a de facto pre-approval process for certain subsidies?

While the CMA will not be responsible for the approval or otherwise of proposed subsidies, the existence of a mandatory referral regime could in effect create a notification regime for certain subsidies (i.e. Subsidies of Particular Interests, or subsidies subject to a call-in by the Secretary of State). As the CMA’s report under the referral process must be published and delivered to the Secretary of State, it also puts the Government on notice of any subsidy voluntarily referred to the CMA for advice (to the extent it is not already aware).  As such, it provides scope for the Secretary of State to engage informally with a public authority if they have a particular view on the CMA’s advice and/or any proposed amendments to a subsidy.

While there is no ability for the CMA or the Secretary of State to prohibit the grant of a subsidy, there is a so-called ‘cooling off period’ which is intended to enable the public authority to reflect on the CMA’s findings before granting the subsidy.  As it is unlikely that a public authority would grant a subsidy if the CMA were to find that a subsidy was not compliant, this referral procedure could create in effect a pre-approval process for ‘high risk’ subsidies.

The process for the mandatory and voluntary referral regime is substantially the same, save that under the voluntary regime it is possible for the public authority to grant the subsidy before it receives a report from the CMA.  The referral process comprises the following steps:

  • the public authority submits a request for a report from the CMA. This report must be requested before the relevant subsidy is granted, and must comply with certain information requirements and be in the form to be specified by future regulations.  The Bill states that the request must include among other things the public authority’s self-assessment of compliance;
  • the CMA must within five working days of receipt of the request for a report provide notice to the public authority that the request: (i) complies with the information requirements of the referral request, or (ii) does not so comply (including the reasons for why);
  • once a request is accepted as complete, the CMA must within a 30 working day ‘reporting period’ produce a report setting out: (i) its evaluation of the public authority’s self-assessment of compliance with the subsidy control regime, (ii) advice on how the public authority could improve its self-assessment, and (iii) advice on how the subsidy can be modified to ensure compliance with the regime. This 30 working day period may be extended by up to 40 working days by the Secretary of State in the case of a mandatory referral or call-in, or in the case of a voluntary referral any such period as agreed with the referring public authority;
  • a five working day ‘cooling off period’ is initiated for subsidies subject to a mandatory referral process (i.e. Subsidies of Particular Interest or subsidies called-in by the Secretary of State).

For subsidies that are called-in by the Secretary of State after they have been awarded, the reporting period is shortened to 20 working days.

While these timescales appear relatively short, there is scope for the CMA to delay ‘starting the clock’ if it has not received a complete referral request from the public authority.  This may mean that in practice there is ‘pre-notification’ dialogue with the CMA prior to submitting a request for a report, as is the case with notifications made to the CMA under the UK merger control regime.

With the CMA also responsible for operating the Office for the Internal Market under the UK Internal Market Act, the CMA will be scaling up resources to ensure it is able to fulfil these additional post-Brexit functions.

  1. A UK internal market imperative

The inclusion of an additional subsidy control principle for the protection of the UK internal market and the prohibition of subsidies conditional on relocation of economic activities between different parts of the UK reflects the Government’s desire to avoid what it calls “subsidy races” between different areas of the UK.  This is a phenomenon that occurs frequently in the US (which has no domestic subsidy control regime). For example, Amazon has been accused of ‘shopping around’ for the best tax breaks for a proposed headquarters.

This kind of internal market imperative already existed under EU State aid law, which assessed the potential location effects of State aid in terms of displacement of economic activities and took a strict approach to aid which simply led to a change in the location of economic activities within the EU’s internal market.

These kinds of considerations will now be applied on a UK-wide basis under the UK’s subsidy control regime.  It remains to be seen however, how these principles will be applied in the case of aid to promote the economic developments of relatively disadvantaged areas, which is an area where complex rules apply under the EU State aid regime.

  1. Self-assessment: from qualification to compatibility?

The jurisdictional thresholds of the regime are broad – with the ‘effect on trade’ jurisdictional limb of the definition of subsidy only requiring that financial assistance is ‘capable’ of affecting ‘competition or investment’ within the UK or ‘trade or investment’ between the UK and a third country.  It is anticipated that the threshold will be low and would be met in most cases, much in the same way that it is in practice under the EU State aid rules.

Coupled with the emphasis on self-assessment instead of notification, compliance assessment under the new regime is likely to become more focused upon compatibility (i.e. compliance with the principles) rather than qualification (i.e. whether or not financial assistance is within scope of the definition of subsidy).

This differs from the conventional approach taken to compliance under the EU State aid regime – where public authorities typically seek to avoid the notification requirement by structuring proposed aid so that it ‘fits’ within a Block Exemption Regulation or is not qualified as “State aid” and therefore falls outside of the ambit of the EU State aid rules altogether.  The UK Government has emphasised that it will not create block exemptions under the UK regime, saying it is taking a “bespoke UK approach” – the guidance for which emphasises that it is risk-based, with this risk assessed by reference the value of a proposed subsidy and the intended beneficiaries.

Under the UK regime, public authorities will be responsible for deciding whether or not to award a subsidy (based upon input from the CMA where relevant).  In practice, however, it is likely that public authorities will seek to ‘push’ assessment of subsidy control compliance to beneficiaries.  Beneficiaries should therefore ensure that they obtain appropriate advice prior to the receipt of any subsidy, in particular in light of the potential for the CAT to order the recovery of any unlawfully granted subsidy from a beneficiary.

  1. More is still to come

It is likely that there will be debate as the Bill passes through Parliament regarding the scope for Government intervention, and the extent of the CAT’s powers of review. The extent to which the Bill will be passed in its current form therefore remains to be seen, but the key aspects of the regime are unlikely to be amended to any significant degree.

The Bill also provides for the making of statutory instruments, including regulations defining the meaning of ‘Subsidies of Particular Interest’ and ‘Subsidies of Interest’ and issuing guidance in relation to the applicable principles and requirements.  This will be key to understanding when public authorities will be expected to undertake a more extensive and involved subsidy control analysis, which in a particular case may extend to seeking the views of the CMA, and how compliance with the applicable principles and requirements will be assessed.

Contacts

Leading the legal sector on climate change with Net Zero Lawyers Alliance

Herbert Smith Freehills is joining forces with other legal sector leaders to fight climate change through the Net Zero Lawyers Alliance (NZLA) – a coalition of commercial law firms committed to helping the world achieve net-zero carbon emissions by 2050. Justin D’Agostino joined leaders from a number of international law firms and corporates to launch the Net Zero Lawyers Alliance as part of London Climate Action Week.

Through their own actions and the legal services they provide to clients, NZLA members aim to act as ‘connective tissue’ in helping transition energy, infrastructure, transport, industry and land-use systems to align with – and accelerate delivery of – climate change mitigation, adaptation and resilience. As part of this, the alliance will help reinforce, and support implementation of, internationally coherent legal frameworks and guidelines for transitioning to net zero by 2050.

Member firms commit to reducing their own operational emissions by at least 50% (from 2019 levels) by 2030, through robust science-based targets. They will also:

  • engage with their clients’ transition and decarbonisation objectives
  • implement dedicated climate change-related training and pro bono targets
  • help clients align their net-zero ambitions within their contracts, terms, and enforcement.

Herbert Smith Freehills has committed to achieving net-zero carbon emissions by 2030, in line with global efforts to limit global warming to 1.5C.

Key contacts

Lewis McDonald
Lewis McDonald
Global Head of Energy, London
+44 20 7466 2257
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612

London Climate Action Week – 26 June to 4 July 2021

We are proud to be a part of London Climate Action Week 2021 (LCAW), the annual event bringing together world-leading climate professionals and communities across London and beyond to find practical solutions to climate change.

Founded in 2019, LCAW is the largest independent climate change event in Europe, helping to shape our future into one that is net-zero, equitable and resilient. Rooted in London, our diverse, international city, LCAW uses its global perspective to spark climate action around the world.

We will be participating in sessions throughout the week which we hope you will be able to join us at:


How can corporates manage the climate transition

Monday, 28 June 2021, 4.00pm GMT

This event looks at the context in which corporates are responding the climate transition, how to develop strategy and seize opportunities and how to manage uncertainties in relation to climate disclosure and reporting.

Silke Goldberg and Lewis McDonald will be joined by Vanessa Havard-Williams and Rachel Barrett from Linklaters for this discussion.

REGISTER >


Climate Change Disputes: Public International Law – too hot to handle

Tuesday, 29 June 2021, 2.00pm GMT

The Paris Agreement signed by 195 countries in 2015 enshrines a commitment to limit the increase in global temperature to well below 2°C compared to pre-industrial levels, in order to avoid the worst effects of climate change. The upcoming COP26 summit will urgently address measures to be taken by States to meet this commitment in light of the continued rapid rise in global temperatures. But the scale of regulatory change and commitment required will test state policy-making and impact across business communities. This session will address the issue of climate change disputes from the perspective of public international law and specifically cover recent and potential climate change-related claims against states, including investor-State disputes, and the prospect of reform of investment treaties, such as the ECT, to accommodate climate change objectives.

Andrew Cannon will be joined by panellists from Jones Day, Clifford Chance, Twenty Essex and Queen Mary University of London.

REGISTER >


Key contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Lewis McDonald
Lewis McDonald
Global Head of Energy, London
+44 20 7466 2257
Andrew Cannon
Andrew Cannon
Partner, London
+44 20 7466 2852

 

 

Private equity investments under the UK’s new national security screening regime

The implications of the UK’s proposed national security investment screening regime have been widely debated since the National Security and Investment Bill (NSI Bill) was introduced to Parliament on 11 November 2020 (see here for our previous detailed briefing).

However, as the NSI Bill progresses through the House of Lords, there has been a notable lack of public analysis of the effect of the new NSI regime on private equity, despite the significant implications for fund managers and institutional investors, whether as holders, sellers or acquirers of investments.

Poll results from our recent private capital webinar on this topic confirmed the importance of the new regime in this context:

  • prior to the webinar, just 17% of webinar attendees had already considered the potential impact of the NSI Bill on their investment strategies or processes in any detail;
  • at the end of the webinar, 78% of attendees expected that they would be likely to be involved in a deal requiring filings under the NSI regime in the course of the next two years.

We set out in this follow-up briefing a short re-cap of the circumstances in which notification may be required under the new UK regime, before considering in more detail:

  • potential differences in the application of the new regime depending on the type of investment vehicle/structure used;
  • the material impact of governance and information rights on execution risk profile; and
  • other practical considerations for institutional investors and fund and asset managers, whether as holders, sellers or buyers of affected interests.

Key takeaways

  • The UK’s proposed NSI regime represents an important new execution risk factor, with a similar risk profile to merger control rules.
  • Broadly speaking, the new regime will apply to any acquisition of “material influence” in a company (which may be deemed to exist in relation to a low shareholding, potentially even below 15%) and the acquisition of control over assets or intellectual property, which potentially gives rise to national security concerns in the UK.
  • The additional execution risk applies not only to new investments, but also to increases in existing stakes which result in the investor gaining material influence, or crossing the 25%, 50% or 75% thresholds.
  • Mandatory notification obligations (and a prohibition on completion prior to clearance) will apply to certain transactions in specified sectors (including acquisitions of a shareholding/voting rights of 15% or more).
  • Whilst notification of relevant transactions in any other sector will be voluntary, in practice it may, in the interests of certainty, often be advisable to notify if there is any risk of a national security issue (broadly defined), owing to the government’s power to “call in” transactions for review in any sector and – potentially – to restructure or undo them.
  • The potential application of the NSI regime should be considered on every deal completed on or after 12 November 2020. Although the NSI Bill has not yet been enacted, once in force the Government’s “call in” power may be exercised retrospectively for up to six months after the commencement of the Act or six months after the date on which the Government becomes aware of the transaction, whichever is the later (subject to a longstop of five years after completion of the relevant transaction).
  • There remains a significant degree of uncertainty as to how the new rules will be applied in practice, in particular in relation to common structures used by private equity and it is important to seek advice at an early stage. The Government is encouraging parties to seek informal advice from the new Investment Security Unit (including prior to formal commencement of the new regime).
  • Investments in “blind pool”, multi-asset funds seem unlikely to fall within scope of the new regime, assuming typically limited governance and information rights of institutional (limited partner or “LP”) investors over portfolio companies. The “blind pool” funds themselves (and their managers) will usually be caught in the same way as other direct investors, but the LPs should not generally expect to have to make individual filings in respect of fully discretionary investments made by the fund manager on their behalf.
  • At the other end of the spectrum, directly-held investments where an institutional investor has engaged an asset manager on a non-discretionary advisory mandate (ie the LP retains control and discretion) will usually result in the institutional investor being caught by the new regime in the same way as any other direct investor.
  • For more-bespoke or ad hoc investment vehicles and structures, including single-asset funds, funds of one, and separate managed accounts, the analysis becomes more nuanced and will require a detailed assessment of governance rights of LPs and information flows in relation to the underlying entity or asset.
  • Key factors to consider in relation to LP governance rights in more-bespoke investment vehicles will include: influence over portfolio company-level decisions and reserved matters, no-fault general partner (GP) removal rights (particularly if exercisable unilaterally), representation on portfolio company boards or limited partner advisory committees (LPACs), and the extent to which the GP has discretion to vary governance or information rights.
  • From a practical perspective, it may be possible for LPs to mitigate the impact of the new UK regime by considering the use of fully discretionarily-managed investment structures rather than making direct investments, or the use of post-acquisition syndication opportunities rather than bidding in consortium at the outset, depending on the particular circumstances.
  • Parties may also wish to explore carving-out potentially-problematic components of the target for the purposes of the investment (acknowledging that this may not be an option in competitive auction processes).
  • Sanctions for non-compliance with the NSI regime will be severe. In addition to the risk of the transaction being void if completed prior to clearance, non-compliance may result in fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of individuals for up to 5 years, as well as disqualification of individuals from serving as a director of a UK company for up to 15 years.
  • Whilst the focus of the new regime is clearly on foreign investment, it applies equally to UK investors, who will be subject to the same notification obligations and potential sanctions. We note, however, the inherent probability of the regime having a lesser impact – and operating as less of a deterrent – in practice where investors of UK origin are concerned.

Please click here to read the full briefing.

Contacts:

Jonathan Blake
Jonathan Blake
Consultant
+4420 7466 2384
Veronica Roberts
Veronica Roberts
Partner, London
+44 20 7466 2009
Gavin Williams
Gavin Williams
Partner, London
+44 20 7466 2153
Stephen Newby
Stephen Newby
Partner, London
+44 20 7466 2481
Ruth Allen
Ruth Allen
Professional Support Lawyer, London
+44 20 7466 2556

Green finance and innovation – point 10 of the UK Government’s Ten Point Plan

In the final limb of its Ten Point Plan (the Plan), the Government acknowledges the significant investment required to achieve net zero through the developments and innovations elsewhere in the Plan. It seeks to leverage public and private sources of financing, increasing investment in research and development (R&D) while cultivating a green finance sector, including through the issue of UK Sovereign Green Bonds from 2021. This builds on the Government’s 2019 Green Finance Strategy and the establishment last year of the Green Finance Institute.

Net Zero Innovation Portfolio

The Government has committed to raising total R&D investment to 2.4% of GDP by 2027 and the first contributor to this is the £1 billion Net Zero Innovation Portfolio, which aims to accelerate the commercialisation of low-carbon technologies, systems and processes in the power, buildings and industrial sectors. The portfolio is designed to focus on priority areas that align with those emphasised in the Plan, including:

  • floating offshore wind;
  • nuclear advanced modular reactors;
  • energy storage and flexibility;
  • bioenergy;
  • hydrogen;
  • homes;
  • direct air capture and advanced carbon capture and storage;
  • industrial fuel switching; and
  • disruptive technologies, including AI for energy.

This builds on recent investments, such as the first phase in November of a £100 million injection in new greenhouse gas removal technologies, including direct air capture, a method of capturing CO2 from the air for storage in geological formations or use in industrial processes. In the Plan, the Government has pledged a further £100 million for energy storage and flexibility innovations, noting the increasing importance of such technologies as the UK more heavily relies on renewable sources of electricity generation and has to counteract their inevitably less predictable generation.

Nuclear fusion

Further to the commitments it makes to large-scale nuclear projects and advanced nuclear technologies in Point 3 of the Plan, the Government has emphasised its continued focus on commercialising nuclear fusion technology. It notes its ongoing £222 million investment in the STEP programme, which aims to build the world’s first commercially viable nuclear fusion power plant in the UK by 2040, as well as £184 million for new fusion facilities, infrastructure and apprenticeships to establish relevant expertise in the UK, creating a so-called “global hub for fusion innovation”.

Transport

In the transport sector, the Government has pledged to invest £3 million in the Tees Valley Hydrogen Transport Hub, which will lead research, development and testing of new hydrogen transport technologies across all modes of transport. This will sit alongside the world’s biggest hydrogen refuelling station in Teesside, plans for which have already been backed by Government. Aiming to address one of the more challenging aspects of decarbonising road transport, the Government has also committed £20 million to trials of zero emission heavy goods vehicles.

Financing – the public and private sectors

In terms of public funding, the Government has indicated that it intends to issue Sovereign Green Bonds in 2021, subject to market conditions, to be followed by subsequent issuances, the proceeds of which will finance sustainable projects and infrastructure. The Government will hope to tap into the exponentially increasing market for environment, social or governance-oriented investments, with around £190 billion of green bonds having been sold last year – 3.5% of global bond issuance.

In the private sector, the Government is continuing to encourage greater private investment in green innovation, building on 2019’s Green Finance Strategy and the corresponding launch of the Green Finance Institute. This organisation, chaired by Sir Roger Gifford, was established to promote collaboration between the public and private sectors, bringing together global experts and practitioners to design new ways of channelling capital into sustainable initiatives. It has since established a Coalition for the Energy Efficiency of Buildings and a Zero Carbon Heating Taskforce, as well as launching a Green Finance Education Charter.

The Plan sets out the Government’s next steps to encourage greener private investment, including introducing mandatory reporting of climate-related financial information across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, aligned to the recommendations of the Taskforce on Climate-related Financial Disclosures. Measures will first be applied to entities such as premium listed companies, with their reach broadening over time, and will allow investors to better understand the impacts of their exposure to climate change, price climate-related risks more accurately and support the greening of the UK economy.

The UK and City of London will also be promoted as a leader in the global voluntary carbon markets, including in response to the recommendations of the Taskforce on Scaling Voluntary Carbon Markets. In relation to compliance markets, the Government wants to formulate a clear carbon price as the UK leaves the EU Emissions Trading System, and has since begun implementation of a replacement, domestic Emissions Trading System.

In order to facilitate informed investment, the Government will implement a green taxonomy that defines which economic activities are environmentally sustainable. The UK taxonomy will take the scientific measures in the EU taxonomy as its basis and a UK Green Technical Advisory Group will be established to review these to ensure their suitability for the UK market.

Together, the Government feels that these measures will provide investors a clear framework in which to deliver the low-carbon finance needed to achieve net zero by 2050. The Government predicts that enhancing green finance overall could attract £1 billion of matched funding and potentially £2.5 billion of follow-on private sector funding to supplement the Government’s own £1 billion investment.

Further measures directed at consumers and taxpayers, including on tax and regulations, are expected as part of HM Treasury’s Net Zero Review.

Matthew Job
Matthew Job
Partner, London
+44 20 7466 2137
Amy Geddes
Amy Geddes
Partner, London
+44 20 7466 2541
Jake Jackaman
Jake Jackaman
Partner, London
+44 20 7466 2883

Protecting our natural environment – point 9 of the UK Government’s Ten Point Plan

Recognising that the natural environment plays a key role in capturing and sequestering carbon, and with the objective of reversing environmental harm and enhancing biodiversity, the government has committed to “safeguard our cherished landscapes, restore habitats for wildlife…and adapt to climate change, all whilst creating green jobs” through plans that include the planting of 30,000 hectares of trees.

What is proposed?

National Parks, AONBs and Landscape Recovery networks

The government proposes to create new National Parks and Areas of Outstanding Natural Beauty (AONB) by designating and safeguarding “beautiful and iconic” landscapes across England from 2021. In addition, ten long-term “Landscape Recovery projects” will be established between 2022 and 2024, which are intended to restore wild landscapes in England, potentially creating “over 30,000 football pitches of wildlife rich habitat”. This is to help sequester carbon and establish the Nature Recovery Network (NRN), which was announced as part of the government’s 25 Year Environment Plan and launched on 5 November 2020. The new National Parks, AONBs and Landscape Recovery projects are intended to protect up to an additional 1.5% of natural land in England, playing a “key role in meeting the Government’s commitment to protect and improve 30% of UK land by 2030”.

Green Recovery Challenge Fund

The government has committed to inject a further £40 million (already having committed £40 million) into the Green Recovery Challenge Fund in 2021, aiding the immediate creation of green jobs to work on conservation and restoration projects across England. This increase to the Fund is expected to deliver over 100 nature projects over the next two years.

Environmental Land Management Scheme

As the UK leaves the EU, the government’s Environmental Land Management Scheme published earlier this year, (the Scheme) is an important part of the UK’s efforts to combat climate change, deliver clean air and water, protect the natural environment and protect from environmental hazards. The pilots under this Scheme are expected to be rolled out next year, with a full roll-out before 2024. The Scheme runs alongside the already existing Productivity Grants available to farmers, to encourage investment in technology to reduce emissions, while making their businesses efficient and profitable.

Flood defences

The government has also committed to invest £5.2 billion over six years from 2021 to protect homes, businesses and communities from flood risks, while also protecting the environment. Such improvement in flood defences is expected to deliver up to 20,000 jobs and protect over 336,000 properties from risk of flooding.

What will the impact be?

Environment

Businesses which require environmental permits for their operations may find more stringent conditions imposed on them or permits refused where their operations have the potential to negatively impact one of the newly protected areas.  They may be more likely to face local objection to the issue of a permit and a greater likelihood of challenge of the decision to grant a permit.

Planning

In planning terms, National Parks and AONBs are protected areas, subject to strict development controls respecting the sensitivity of the landscape. The recent Planning White Paper proposes to preserve such controls, noting that, for example, AONBs would be designated as “Protected” areas within the proposed new local plan system and subject to a presumption against development. Whilst beneficial for environmental protection, existing development controls in National Parks have created an imbalance between housing need and supply. This is acknowledged in the Planning White Paper, noting that the proposed new standard method for establishing housing requirement figures would have to take this into account to avoid undermining the purpose of National Parks. However, if the number and area of National Parks and AONBs significantly increases, the area of land subject to stricter development controls, and therefore not available for housing development, will also increase. The potential impact of this on the government’s ability to meet its ambitious housing target of 300,000 new homes per year (1 million by the end of this Parliament) is not clear. Designation of land as a National Park or AONB will certainly help those objecting to new homes in such areas.

The Environment Bill, which has resumed its passage through Parliament, includes a requirement that “responsible authorities”, including National Park authorities in England, must prepare and publish local nature recovery strategies. This will support the creation of the NRN. These proposals to protect the natural environment, safeguard landscapes and restore habitats also repeat existing commitments in the 25 Year Environment Plan to conserve and enhance the beauty of the natural environment, meaning that they will be capable of scrutiny by the Office for Environmental Protection (OEP) to be created pursuant to the Environment Bill.

Commentary

The government’s plans are a welcome step towards protecting natural landscapes and restoring wildlife habitats. However, they are effectively only a partial implementation of the much wider ranging commitments made in the 25 Year Environment Plan issued in 2018, which covers additional aspects of environmental protection such as waste, water and clean air in a much more comprehensive fashion than those aspects showcased in the latest Ten Point Plan.

Progress against the 25 Year Environment Plan to March 2020 was reported on by Government earlier this year and scrutinised by the Natural Capital Committee (NCC) which advises government on the natural environment and implementation of the 25 Year Environment Plan. The NCC highlighted in their October response to the progress report that the majority of England’s natural assets (air quality, marine environment, soils and land) examined by the NCC, five out of seven were still “deteriorating”, while no natural asset group was making progress in meeting existing targets and commitments. However, the NCC’s role with regard to progress under the 25 Year Environment Plan ends this year, and will pass to the new OEP once it is established in 2021. Of key importance therefore will be the new body’s confidence and enthusiasm for continuing to hold the government strictly to account.

Catherine Howard
Catherine Howard
Partner, London
+44 20 7466 2858
Julie Vaughan
Julie Vaughan
Senior Associate, London
+44 20 7466 2745

Carbon capture, usage and storage – point 8 of the UK Government’s Ten Point Plan

Becoming a world-leader in carbon capture, usage and storage (CCUS) technology is at the heart of the UK Government’s new plan for a “green industrial revolution” released on 18 November 2020 (Ten Point Plan).

The Ten Point Plan makes it clear that by capturing carbon from power generation, low carbon hydrogen production and industrial processes, and storing it underground so that it cannot enter the atmosphere, CCUS technology will play a critical role in addressing the UK’s ambition to become a net zero economy. The Government aims to use CCUS technology to revitalise industrial regions and capture and store 10 Mt of Co2 per year by 2030. Recognising that no one country has yet captured the CCUS technology market, the Ten Point Plan emphasises the UK’s unique position to lead in this respect, with the unrivalled asset of having the North Sea that can be used to store captured carbon under the seabed.

The government sees in CCUS technology a means to contribute to the economic transformation of the UK’s industrial regions, enhancing the long-term competitiveness of the UK industry. In fact, the Ten Point Plan reveals a £1 billion CCUS Infrastructure Fund that will be used to establish CCUS technology in two industrial clusters by mid 2020s, and aim for four of these clusters by 2030, saving the equivalent of 9% of the 2018 UK emissions between 2023 and 2032. The Ten Point Plan concludes that CCUS technology would support up to 50,000 jobs in the UK by 2030, with a sizeable export potential.

There is also a cross-over between CCUS and other elements of the Government’s Ten Point Plan. The Ten Point Plan recognises the link between low carbon hydrogen production growth and the expansion and increase of CCUS infrastructure, and the combination of CCUS technology and hydrogen will render the creation of various CCUS clusters possible in what the Government describes as industrial “SuperPlaces”. To set this plan in motion, the UK government is expecting to execute in 2021 a process for CCUS development, working in collaboration with industry and set out further details of a revenue mechanism for industrial carbon capture and hydrogen projects.

With plans for more than 30 new integrated CCUS facilities announced globally since 2017[1] and increased action by governments worldwide to incentivise technologies that capture carbon emissions, the Ten Point Plan is part of the UK’s plan to becoming a global leader in CCUS technology.

HSF will follow new UK policy papers on CCUS closely – follow our Energy Notes blog for more information as the policies evolve.

[1] www.iea.org/reports/ccus-in-clean-energy-transitions/a-new-era-for-ccus#growing-ccus-momentum

Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 7470
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2537
Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679